updated 6/1/2008 12:35:41 PM ET 2008-06-01T16:35:41

Investors examine the same key economic reports at the start of every month — on manufacturing, the service sector and employment. This week, they’ll be looking at these indicators for inflation clues as much as they will for insight into economic growth.

Major Market Indices

Inflationary pressures have overtaken recession as Wall Street’s primary concern. At least for now.

The market has been mercurial lately, confident that it has a lot to worry about but not completely sure what to worry about most. There are so many choices: the ever-sinking housing market, the still-strained debt markets, and ongoing deterioration in consumer credit.

But what has appeared in recent weeks to be the most tangible, widespread risk to consumer spending — and therefore the economy and corporate profits — is the high price of food and energy. Just months ago, the market was monitoring every tick in interest rate spreads. Now it’s all about light, sweet crude.

“The biggest story continues to be oil,” said Michael Sheldon, chief market strategist at RDM Financial Group in Westport, Conn. It is true that oil has been rising for many years now, he said, “but over the past few years, there was positive employment growth, rising asset prices, positive real wage growth. In the current environment, those tailwinds are missing — as a result, oil prices are a bigger and growing worry for consumers and the economy.”

With that in mind, economic readings take on an additional role; nearly everyone has some measure of inflation that will be more closely watched than usual. The Institute for Supply Management’s manufacturing and service sector reports include price indexes, and the Labor Department’s employment report reveals unit labor costs.

To be sure, this week’s reports will still be read for hints about where the economy is headed. The ISM manufacturing report is expected to indicate another small contraction for May, and its service sector report is expected to post very tame expansion. The employment report is expected to show the fifth consecutive month of U.S. job losses and an uptick in the unemployment rate to 5.1 percent.

There’s little chance that investors will be rid of their inflation worries anytime soon. A pullback in oil could provide a boost to stocks, but Wall Street’s jitters are not likely to let up until it sees a prolonged energy price decline.

“Our new chief concern seems to be inflation,” said Arthur Hogan, chief market analyst at Jefferies & Co. “We’ve shoved recession to the back seat and inflation gets to ride shotgun. ... The market seems to be in lockstep with crude prices right now.”

Stocks gained last week in response to a brief oil price retreat, a better-than-expected reading on durable goods orders and an upwardly revised estimate of first-quarter gross domestic product. The Dow Jones industrial average rose 1.27 percent, the Standard & Poor’s 500 index rose 1.78 percent, and the Nasdaq composite index rose 3.19 percent.

This week, in addition to economic data, the market will be reading a few earnings reports on housing-related companies such as Thornburg Mortgage Inc., Toll Brothers and Hovnanian Enterprices Inc., as well as consumer brands including Williams-Sonoma Inc., Del Monte Foods and Cascade Corp.

“One thing that is challenging for the market and investors,” Sheldon noted, “is there are not only cross-currents in the economy, but also cross-currents in how companies are doing.”

The corporate picture is mixed. Last week, a few big names including Dell Inc. and MasterCard Inc. gave healthy outlooks for the year, while other companies such as Sears Holding Corp., KeyCorp and J. Crew Group Inc. disappointed investors.

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